OPIS Blog

Airlines are staring down a long road back in the wake of a veritable cliff dive in travel demand, which has led to an equally steep drop in the cost of jet fuel.

First, an encouraging perspective amid the bleak picture for airlines: One of the bright spots emerging from the coronavirus disease 2019 (COVID-19) pandemic is the tremendous work people are doing across multiple industries to help one another.

Few industries have been hit as hard as the airline sector, but airlines, while dealing with the crisis, are also providing a vital service, delivering critical medical personnel and products where they are needed to save lives.

The list of airlines doing their part is impressive: United, American, Delta, Hawaiian, UPS, FedEx, Alaska, Atlas and others. Most of the airlines have increased their cargo capacity to help fulfill medical supply needs, even as they have gutted passenger flight schedules from COVID-19.

Still, the great work the airlines are doing can’t alleviate the financial pain they are experiencing because of lost revenue.

The Immediate Forecast Looks Dark for Airlines Amid COVID-19

Australia’s second largest airline, Virgin Australia, is seeking bankruptcy protection, published reports indicate – one of the first big airlines to do so.

The International Air Transport Association has estimated airlines may burn through more than $61 billion of their cash reserves during the second quarter, while posting quarterly net loss of nearly $40 billion.

Some of IATA’s assessments are based on a scenario where severe travel restrictions remain in place for three months – through June 2020.

Many airlines have already tapped into their maximum available credit lines to meet daily operational expenses, with some admitting there are coughing up $50 to $100 million in daily losses.

Airline executives have taken pay cuts or are going without pay for an extended period, while airline employees have volunteered to take unpaid leaves from work to aid in reducing costs.

Alexandre de Juniac, IATA’s director general and CEO, has said that airlines aren’t able to pare costs fast enough to stay ahead of the impact of the crisis, made worse by the liability for potential ticket refunds.

And no one can predict when passengers will return in force to the air given all the uncertainties that continue to surround the spread and the control of the coronavirus.

Decline in Aviation Fuel Prices Provides Some Cost-Saving Relief

The decline in jet fuel prices has provided some relief to the extent that airlines are still using fuel. And though they are strapped for cash and may not be positioned to hedge fuel costs, the steep plunge in fuel prices offers a tempting target to try to lock in future fuel savings.

Airline fuel buyers would be advised to pay close attention to forward spot jet fuel prices, thanks to the historic OPEC+ meeting that was a first step in clearing up the staggering fuel surpluses impacting near-term oil prices.

The alliance agreed to trim some 10 million b/d of crude oil production. The expected cuts, which are for May and June, when paired with shut-ins in the coming months from the U.S., Canada, and other non-OPEC producers could remove some 14 million b/d of crude from the market in the next two months.

Roger Diwan, vice president financial services, IHS Markit, said this is critically needed relief in the face of declines in global crude demand estimated around 20 million b/d.

When Will Jet Fuel Demand Kick Back In?

Of all the major products, jet fuel demand has been hit the hardest and may very well be the slowest to recover.

Still not known is when global oil demand for jet fuel, gasoline and diesel fuel will rebound to help clear up surpluses of finished products that have mounted.

The price of crude oil in a historic transformation turned negative and May refined product prices continue to see downward price pressure.

Each week the oil supply/demand data released by the U.S. Energy Information Administration (EIA) documents the progressive loss in U.S. jet fuel consumption. Deliveries have dropped to 463,000 b/d through the start of April, the lowest single-week delivery rate in the four decades of OPIS pricing history. That number compares to pre-COVID demand rates that in 2019 and early 2020 easily topped 1.8 million b/d and often surpassed 2 million b/d.

On a percentage basis, jet fuel deliveries for March were down more than 40%, EIA data shows, which is 8% greater than the decline in motor gasoline consumption. The percentages are likely to get greater in the coming weeks.

IHS Markit forecast modeling for jet fuel consumption through 2021 points to jet fuel usage rates, relative to 2019 levels, to be slower into 2020’s fourth quarter. They don’t match any of the 2019 robust levels until July 2021. Even then the highest number on a monthly basis is just over 1.72 million b/d for U.S. consumption.

Murky Path for Jet Fuel Environmental Initiatives

Also unknown is the impact all of this will have on airlines having to meet the highly anticipated Carbon Offsetting and Reduction Scheme (CORSIA), the decarbonization plan that was set to accelerate at a much faster pace starting in 2020 and proceeding over the next several years.

Regulated by the United Nations' International Civil Aviation Organization (ICAO), CORSIA was designed to work under the principle of using carbon credits and sustainable aviation fuel to offset the growth in emissions using an average of 2019 and 2020 aviation emissions as a target baseline.

COVID-19 has all but wrecked the 2020 baseline numbers.

IHS Markit believes the entire CORSIA plan is under threat as cash-strapped airlines battle to rebuild their businesses and may not have the incremental cash to meet compliance.

Associate Director of Oil and Downstream Ronan Graham said in a recent note the "catastrophic decline in demand for air travel in 2020" will scale back the industry's decarbonization drive as they "battle for survival."

The post-2020 aviation industry will encompass a "smaller set of well-capitalized airlines, likely offering fewer routes at a higher cost" and "fear of contagion will persist" keeping demand below 2019 levels, Graham said.

Understand the basics of how jet fuel is priced in this OPIS Crash Course podcast episode: